Regular contributor Diane Harrison delves into the data about the world's hedge fund industry to consider what the outlook is for this year and beyond.

The following article is by a frequent contributor to Family Wealth Report, Diane Harrison. In this article, she refers to what can be gleaned by a recent major report on the state and size of the world’s hedge fund sector. Wealth managers are, of course, significant investors in the industry. Hedge funds have had more than their fair share, arguably, of hostile coverage in recent years, with questions asked about their relatively high fees and constant questions on whether investors get value for money from the bulk of such funds. But after a tough period this sector seems to be resilient, with assets under management hitting records.

Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 and specializing in a wide range of writing services within the alternative assets sector. She has over 20 years’ of expertise in hedge fund marketing, investor relations, sales collateral, and a variety of thought leadership deliverables.

The editors of FWR are grateful to Harrison for her views and as ever, invite readers to respond.

Every year, Preqin, the research firm, publishes its annual review of the hedge fund industry: 120-plus pages of data and analyses providing a detailed look at the industry’s makeup.

Some findings to consider for 2015

Preqin’s 2014 Global Hedge Fund Report, released in February, includes information which can assist investors and providers of hedge fund services with a game plan of action to implement in 2015. With over 4,800 participants contributing information and responses to Preqin’s survey data, the findings give some indications of the direction the hedge fund industry is heading in the near future.

Here are five such items I thought notable to extract as bellwether factors supporting 2015 as another year poised for the industry’s growth.

1, The pie slice is growing.
More fund allocations will shift from long-only and fixed income to hedge funds in 2015. This indicates that not only is the interest and appetite level of investors for hedge funds growing, but the portfolio allocation slice devoted to hedge funds is now gaining ground from traditional assets versus cannibalizing other alternative asset allocations. With over $3 trillion in assets under management, the hedge fund industry is likely to get bigger at the expense of traditional assets.

2, Hedge funds are here to stay.
Some 84 per cent of investors plan either to increase or hold steady on their hedge fund allocations in 2015. And 85 per cent of consultants to these investors plan to recommend the same action. These overwhelming figures give credence to hedge funds’ ability to offer diversification, protection against market downturns, and lowered volatility for investors even when relative performance may not be superior to other asset classes.

3, Small is the new big.
Investors listed better returns and negotiable fees as two of the primary reasons they look to emerging managers when considering hedge fund allocations. These managers are more likely than their larger counterparts to negotiate fees with investors. Some 91 per cent of investors feel that small and emerging managers have met and/or exceeded performance expectations in 2014. 68 per cent of emerging managers have less than $250 million in AuM, indicating that manager supply in smaller funds is available to match this growing demand.
 
4, Tracking the performance.
As of the end of 2014, 20 per cent of emerging fund managers launched their funds in the last three years. This fact is notable in that institutional investors who require at least three years’ track performance will now have increased options to choose from in the 2015 emerging manager fund universe.

5, Who’s playing?
The survey findings show that, at the end of 2014, insurance companies are beginning to join the hedge fund investment party. Though they only contributed 2.4 per cent of the investor base in hedge funds - a figure which lagged all other institutional investors - insurance companies allocated larger amounts in dollars than the average institution. This factor is relevant in showing their growing interest in hedge fund investing as a meaningful trend for 2015.

Liquid alternative products grew in popularity as well, with over $240 billion in AuM in 348 funds at the end of 2014. Investors fueled this growth with their desire for liquidity and scale in a mutual fund structure providing the benefits of a hedge fund.

And finally, fund-of-fund structures, formerly derided as fee-pumped performance laggards, are sharpening their focus to add value.

As of the end of 2014, fund-of-funds posted their first year of growth since 2011, illustrating their willingness to retool themselves into investor-focused vehicles offering manager selection and due diligence expertise wrapped in a simplified investment option.

Outlook is favourable for 2015

While there is no question that investing in anything these days poses risks, the 2014 findings point to some bright spots for astute investors. The hedge fund industry is showing some true spikes in interest and opportunity from both the buy and sell side. It remains to be seen whether or not it will capitalize on them in 2015.